Annuity Factor Method

AAA

DEFINITION of 'Annuity Factor Method'

A calculation method to determine the amount of eligible withdrawals that an investor can make from their IRA without incurring penalties. The calculation uses life-expectancy data; however, it utilizes different data than is used in the amortization method.

Using the annuity factor method, a retirement-account holder would divide the current IRA account balance by an "annuity factor." The annuity factor is calculated based on average mortality rates (using the mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "reasonable" interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

INVESTOPEDIA EXPLAINS 'Annuity Factor Method'

Using the annuity factor method, an investor can ensure that he or she does not lose account value to potentially costly penalties. It can also help an account holder determine how much money he or she may need to raise through other means (such as by securing a loan) in addition to withdrawing money from their retirement savings account to meet their current financial needs.

Withdrawing money from a retirement plan should be a careful decision as it gives the account holder less time to recoup value and earn interest on plan assets.

RELATED TERMS
  1. Annuity

    A financial product that pays out a fixed stream of payments ...
  2. Annuitization Method

    A type of annuity distribution structure that gives the annuitant ...
  3. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  4. Withdrawal

    Removing funds from an account, plan, pension or trust. In some ...
  5. Early Withdrawal

    The removal of funds from a fixed-term investment before the ...
  6. Contingent Annuitant

    Someone designated by an annuitant to receive the annuitant’s ...
RELATED FAQS
  1. Is an annuity a perpetuity?

    An annuity can be a perpetuity, depending on how it is set up. An annuity is an investment that makes regular payments throughout ... Read Full Answer >>
  2. What are the most common deferred tax assets used by individuals?

    Deferred tax assets – those that are only taxed when funds are withdrawn or the asset is sold – are quite common in estate ... Read Full Answer >>
  3. Are annuities for seniors only?

    Though annuities tend to be advertised primarily to seniors, there is no reason why younger generations should not make the ... Read Full Answer >>
  4. What is a longevity annuity?

    A longevity annuity is an investment contract with an insurance company designed to address the potential financial problems ... Read Full Answer >>
  5. What is the difference between a fixed and variable annuity?

    For many people, saving for retirement means tucking money away in a diverse range of investments. Because traditional savings ... Read Full Answer >>
  6. What type of investor should consider annuities?

    Annuities offer great benefits for a secure retirement. Though the features, provisions and associated fees of each are different, ... Read Full Answer >>
Related Articles
  1. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  2. Taxes

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  3. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  4. Retirement

    Traditional IRA Deductibility Limits

    Find out where you can take a tax deduction on the contributions you make.
  5. Entrepreneurship

    Business Owners: How To Set Up An SEP IRA

    SEP IRAs are simple to set up and run, making them a popular choice for business owners.
  6. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
  7. Taxes

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  8. Personal Finance

    Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules.
  9. Taxes

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  10. Retirement

    Roth Vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center